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A few rants...

Financial Advice | General

By Justin Modray, published 29 September 2012.
Helpful? 25

Inflation figures, NEST, MAS, wealth taxes, there's lots to rant about.

We've always known that a lot of the stuff governments do makes little sense; politicians are often too busy posturing and looking after own self-interest to make positive long term contributions to society. And even when the intention is good, the execution is all too often flawed. But as far as 'money' is concerned things seem especially bad, or am I just feeling even more cynical than usual? A few rants that spring to mind...

RPI the new CPI?

The Office of National Statistics will consult on whether to change the way RPI is calculated, to bring it more in-line with CPI. There are 3 main differences between the two measures:

  • What's included: RPI includes some housing costs that CPI doesn't.
  • Who's represented: CPI represents all households whereas RPI excludes the highest earners and pensioners living mostly off benefits.
  • The maths: RPI is calculated using arithmetic mean whereas CPI uses geometric mean - different ways to measure an average . Don't worry about the jargon, the bottom line is CPI's method is a bit more relevant because it assumes people change their spending habits in proportion to price changes - i.e. if bread A becomes more expensive than bread B, you might buy more of B and less of A.

The maths part is important as estimates suggest it makes CPI about 0.9% lower than RPI, ignoring the other two differences. And it's really this that the ONS is proposing to change.

From an academic point of view it arguably makes sense. But the wider implications of such a change in practice are massive and make less sense.

The Government will save a fortune on the interest and redemption payments of index-linked gilts (although the contracts on a few index-linked gilt issues may require the Government to redeem them early in this event). And employers with final salary pension schemes may benefit, as the cost of inflation-linking pensions would likely fall.

But those with RPI-linked pensions, investments and savings could stand to lose out, potentially by a lot longer term - such change would be largely detrimental to and unpopular with the public.

NEST

The majority of the population faces a big pension shortfall, i.e. they're not saving enough to enjoy a comfortable retirement. The idea to automatically enrol employees (who don't already have access to a company pension) into a simple low cost scheme is therefore laudable.

However, the Government's attempt at this ('NEST') has a few possible glitches. Perhaps the biggest is that while the annual charge will be a very low 0.3%, there's an additional 1.8% initial charge on contributions - necessary to compensate for civil servants blowing too much cash when setting up NEST. There's no word yet on how long this extra charge will be levied, but it's very unwelcome.

There's also the problem that many of the pension-starved employees NEST is targeting may decide to opt-out, wrongly viewing their compulsory contribution as more of a tax than investment in their future. And employers might try to drive down employee benefits elsewhere to help fund their compulsory contribution - meaning employees won't necessarily be better off.

Nice concept, but in practice I fear NEST may be doomed.

Money Advice Service (MAS)

The population doesn't just face a pension shortfall, there's a big shortfall in money knowledge and education too (if only everyone would visit my site!).

Step forward the Money Advice Service (MAS), the Government's answer to the problem. Trouble is, despite spending tens of millions of pounds on a website, staff and marketing (funded via a compulsory levy on financial services companies), it really isn't very good - just take a look at its website or try calling the MAS helpline with a technical question.

Browse the annual accounts and you'll see senior staff on bloated six figure packages and money being spent left, right and centre - the only thing MAS seems any good at. MAS is obviously immune to the recession hitting the rest of us - annoying to see quangos like this are alive and well.

LibDem talk of a wealth tax

Whether you like the LibDems or not, you'll probably agree they have little chance of getting into power other than via the weaker half of a coalition government. But this doesn't stop Nick Clegg et al. announcing half-baked ideas to more heavily tax the affluent. I'm not against the rich bearing a greater tax burden, but wealth taxes (usually an annual tax on assets above a given threshold) are notoriously difficult to implement, police and run cost effectively. A number of European countries have ditched wealth taxes over the last 15 years for these very reasons. Luckily, unlike the above examples, it's all talk, and that's probably all it ever will be.

Anyway, rants over for now, but I'd love to hear yours, please post below...

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Readers' Comments (1) - To post a comment please register or login .


Comment by rafferty at 4:41pm on 01 Oct 2012:

I'd share your concerns on changes to the RPI. If the RPI is considered not fit for purpose then by all means argue for dumping it and introducing a new alternative. But to substantially alter the way it's calculated while still retaining the same name would be a nonsense if not dishonest.

I've never quite understood what the LibDems are for. They've long been in the habit of dreaming up half-baked "policies" which are often quite different for different audiences in different regions. They had the luxury of saying anything knowing they would never be elected as a government and when they shocked themselves by getting into a position where they had some degree of power the policies were immediately dumped. The excuse was that they weren't the majority - as if they'd seriously expected to be the majority party when they offered those policies to the electorate.

Even their European policies seem to have been hidden behind the sofa and the only policy they've held consistently was the self-serving one of changing the electoral system so that more of them could get elected; and they've blown their changes on that one for many years to come. They're still very concerned about uneven pavements I believe but the next election could be a big chance for the Monster Raving Loonies.